By Natalie Bruckner. Photo credit: Claire Bao. Originally published in the Summer 2021 edition of Business Class magazine.
You’ve invested time, money and so much energy into building your business. Suddenly, your situation changes and you need to sell, now! It’s not exactly something you’d planned for because you were so busy juggling all the balls it takes to build a business.
You’re not alone if you’ve been asking yourself, “What if I had to sell?” It’s a question that’s come up for many businesses lately as they’ve headed down the rocky pandemic road.
Jessica Craig, business broker at Pacific M&A and Business Brokers Ltd., MBA ‘19, and Morgan Tate, co-founder of Paratus Business Resources, BCom ‘17, are in the business of mergers and acquisitions (M&A). They have helped countless business owners successfully exit their business.
Their top advice? Start thinking about your exit plan as soon as you can.
To a start-up or a new entrepreneur, it seems counterintuitive to think of leaving a business before it’s even got off the ground. But that’s one of the biggest mistakes a start-up makes—and why 80 to 90 per cent of business owners end up going out of business, when, instead, they could have sold it and made some hard cash.
“When you hear about M&A, you think about Facebook’s $1 billion acquisition of Instagram—you don’t think about the coffee shop in town being bought by somebody. It’s a secret world in many ways because it doesn’t go public,” explains Tate.
Tate adds that most business owners get so busy fighting daily fires, they don’t have time to plan ahead. So when it’s time to exit (having spent thousands of hours building upon their passion), all that hard work comes to nothing because they don’t have a true grasp of the value of their business.
Ask small- to medium-sized business owners what “EBITDA” means, for example, and many won’t know. But earnings before interest, taxes, depreciation and amortization are extremely important to the business valuation process, “and something every business owner should know,” says Tate.
This leads us to the biggest misconception out there with M&A: that your business—the one you have poured years of sweat, blood and tears into—just isn’t worth anything. And that’s the beauty of what Craig and Tate do. They make sure that all that hard work doesn’t go to waste.
“I find that there are a lot of resources out there that focus on advice for entrepreneurs and plenty of places, like Small Business BC and the Women’s Enterprise Centre, which offer great resources for how to start and build your business. But when you get to the point where you are ready to sell it or to make a transition, many of those resources dry up,” says Craig. Tate agrees, adding, “There’s so much room on that front to build awareness and education.”
Both Tate and Craig are driven by their passion for business and a desire to help others get out of their business what they put in, making them well-suited to the M&A world. As they explain, M&A isn’t something just for those at the end of their business journey wishing to retire.
“When you go into the business, you have to think about your exit strategy—this makes you plan ahead, whether that’s five years or 20 years. There’s a lot that you can do right from the outset that puts you in a good position, so should somebody reach out and want to buy your business, you will be in a good spot and be able to take that opportunity,” says Craig.
A good place to start is by understanding your tax strategy and what your accountant is doing—
and when you don’t understand something, don’t be afraid to ask about it.
While Craig’s M&A involvement is very much face-to-face (or Zoom-to-Zoom these days), Tate mixes that with an online platform he helped create (Paratus). It directly targets small- to medium-sized businesses.
“A lot of small businesses get neglected; that’s why we came up with this software solution. There are many costs to selling a small business; these costs become a bigger percentage of the purchase price the smaller your business is,” says Tate.
Interestingly, Paratus was launched in the spring of 2020. A risky time, some might say, as the world saw
the eruption of the pandemic, and yet, both Tate and Craig agree that COVID-19 has had little impact on the world of M&A.
“Nobody really knew what was going to happen back in the spring of 2020. The fortunate thing for us is that buyer interest has remained strong, especially here in Victoria. By the end of May 2020 it started picking up and then just continued to grow,” says Tate.
Similarly, Craig says she hasn’t witnessed any significant impacts on the market, but believes in the long-term the restaurant industry could be impacted. “We definitely don’t want to ignore COVID-19, but we also don’t want to overemphasize the impact it will have on your valuation. If you have had a really great growth trajectory for the last five years, and then the value dropped because of COVID-19, yes, that will have an impact, but it may not be as terrible as you might think. More importantly, you have to consider, is now the right time to sell? There may be a lot of underlying factors that could influence your decision to sell, other than the impact the pandemic has had on your business value.”
Craig noted that the evaluation process can be tricky, as most owners overestimate the value of their business. A client may perceive their business to be worth a certain multiple or percentage of revenue and think, okay, that’s about $1.5 million, only to have it valued and get a result closer $300,000.
“This is not unheard of, but planning ahead and having valuations performed regularly, before you are ready to sell, can give you a better understanding of what is generating that business value and how to improve it to get closer to a value you are happy with,” says Craig.
As for the timeline, on average a business takes six to nine months to sell. Although, Craig says, there has been the odd unicorn when a business has sold in six weeks because they had all their ducks in a row, and both buyer and seller were really flexible.
Craig advises owners who find themselves in a situation and want to sell quickly, to still meet with an adviser.
“For those that are in a bind right now, I recommend reaching out to someone like Morgan or me to help them understand their options. Selling might not be the best or only solution, but at least they will have an idea
of what it might look like and not wonder, ‘what if?’ later on.”
She also recommends discussing a potential sale with an accountant to understand the tax implications and financial impacts of the various options.
“Each business and personal circumstance is unique so it’s impossible to know what the best option will be for each business, but that’s what we’re here for,” says Craig.
And what about selling a business yourself? Craig admits it can be done, much like selling your own house, but she advises caution.
“A broker can objectively look at what’s going on in your business, provide a realistic evaluation and prepare your business for sale, while maintaining confidentiality. A lot of people plan to ask around or post something online to find a buyer, but that puts you in a very delicate position, as staff, competitors and clients may find out and disrupt your regular operations, which can lead to a huge drop in sale price or kill a deal you are working on. There’s a certain management needed with appropriate non-disclosures, and strict confidentiality between advisers. It can be very delicate, especially with small businesses,” says Craig.
Looking ahead, Craig and Tate see the world of M&A becoming more prevalent as more transactions happen. According to data from the National Venture Capitalist Association’s 2018 yearbook, mergers and acquisitions in 2017 accounted for 93 per cent of the 809 venture capital-backed exits. Despite the slight drop last year, things seem to be back on track.
“The best advice I can give is to plan your exit when you launch your company. The earlier you establish your exit strategy, the clearer the vision becomes for you and your company,” says Tate.
